The black box of auditing
A classic complaint about PCAOB inspections is that they don’t add value to the audits they review. Sure, a warm fuzzy feeling might creep into someone’s belly if they know that an auditor is auditing the auditors, but many people want something measurable. For those that fall into that group, a recent study from Professor Nemit Shroff of MIT might offer a bit of satisfaction. In a statement, he explains that:
Once a company’s auditor is inspected by the PCAOB and receives a clean report, the company is able to raise additional capital equal to .5% of its assets. This .5% is equal to approximately 10% of the average amount of external capital raised, which is extremely significant. While not all firms raise capital, when they do engage in this behavior, they raise 10% more if their auditor is PCAOB-inspected.
Professor Shroff concludes in a statement, “[T]he PCAOB adds significant value to the financial reporting process. It opens up the black box of auditing, which benefits both investors and companies.”
But does it open the black box enough? We still don’t know which companies’ audits were inspected. If the PCAOB inspects audits in a forest, does anyone know they’re inspecting? The context of whom the auditors are auditing still seems pretty important here, especially if you want to connect their work to the value created by their work.
Which isn’t to say that this isn’t progress. It’s just that the black box of auditing is really dark.
The Financial Times reports on Deloitte’s revenue in the U.K., and it’s nothing to sneeze at:
UK revenue increased 11.2 per cent to £3.4bn in the year to the end of May, the firm said on Tuesday. While it was the second consecutive year of double-digit growth, the rate of growth was slower than in 2016, when revenue rose 13.6 per cent.
Distributable profit in 2017 was flat year on year at £608m, in part reflecting the company’s decision to invest in developing new technology-driven services for clients and in several “technology alliances and acquisitions”, it said. Average profit per equity partner was £865,000.
That’s a shade over $1.1 million in USD, so congrats everyone, nice job, or perhaps I should say, “Brilliant. Ace. Cheers. Now, bugger off.” On a different note, what the FT reports is essentially what Deloitte gives them. So while there’s more info on the firm’s performance and partner compensation in the U.K., like the U.S., it’s all coming from the same place.
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